The multi-disciplinary Pensions Advisory Group (PAG) of which I am a member, under the joint Chairmanship of Mr Justice Francis and HH Edward Hess, is wrestling with Offsetting. The problem is this:
1. Vast majority of Financial Remedy Applications, where there is an imbalance in pensions, resolve the imbalance by Offsetting, often informally – (W keeps the house with the equity and H retains his pension – apologies for the stereotype), but sometimes more carefully crafted.
2. Vast majority of cases never get seen by a pensions expert. In the absence of an expert, only real figure available is the CEV.
3. Take the case where W is aged 55, has NHS pension with CEV of £156,354. H is aged 58, has a money purchase pension (SIPP) with CEV of £198,640. On the face of it, if we use CEVs (which in the absence of an expert, I can see no alternative) H has £42,286 more in pensions than W, therefore (subject to adjustment for Tax / Utility (if any)) W should retain £42,286 more in non-pension assets.
4. BUT if we look at the pension each party may receive, W will receive index linked pension from age 60 of £7,496 pa and lump sum of £22,490. If H takes same lump sum as W of £22,490 (so we can compare like with like) he will only be able to secure an index linked pension of £5,183 pa.
5. So CEVs suggest direction of travel of offset capital is from H to W, whereas the reality W has greater value pension than H, and so direction of travel should be in the opposite direction.
6. So how without instructing an expert will this be resolved, given only figures really available are the CEVs which misrepresent the truth of the position?
7. It is no co-incidence that of all of the negligence cases we have dealt with (we only act for the solicitors, never for the claimant) every single case has been alleged negligence in offsetting, none have been for pension sharing.
The above problem boils down to this. The CEV of a defined benefit pension (NHS) is calculated in such a fundamentally different way to the CEV of a defined contribution pension (H’s SIPP) that any attempt at comparing the two CEVs is utterly meaningless. You may as well compare an Apple, not with a Pear, but with a Jumbo Jet – there is no comparison. The relative sizes of the CEV cannot even tell you who has the more valuable pension!
So now the Pensions Advisory Group is wrestling with how to deal with this problem. As much as I would welcome an expert being instructed in every case, that is not a practical solution. We shall see what happens.
However, yesterday I was fortunate enough to be invited to speak at Paul Cobley’s (of Oak Barn Financial Planning) annual Pensions and Divorce seminar in Surrey. It is one the great annual “information” events on the calendar – unfortunately it is like the New Year’s Day Vienna Concert – sold out each year within hours of tickets going on release (Paul by the way also sits on the PAG committee, and is incredibly knowledgeable in his field). At the seminar I asked a rather fundamental question of the audience of 100 solicitors:
I asked an audience of 100 solicitors (cue Les Dennis images and Family Fortunes music), if this case had involved just W’s NHS pension, how should it be valued for offsetting purposes. The options were:
1. It should be the value of W’s pension to W. i.e. a true value (however calculated) to her of her future pension income. A figure, if you like, to place on her side of the balance sheet.
2. It should be the cost to H of acquiring the same pension that W will expect. That is to say, W will get a pension of £7,496 pa and a lump sum of £22,490, how much does H need to get the same level of benefits. In essence, what is the value of W’s pension to H.
Now this is a rather fundamental question isn’t it? If we do not know the principle of how pensions should be valued for offsetting purposes, how can we expect any level of consistency of approach from the experts. Not surprisingly, the room was divided.
Sorry for this communication being somewhat drier than my usual style, but this is such an important issue to resolve, and I fear that we have moved nowhere in the last 18 years really, other than in big money cases which occasionally get tested.
I reiterate, for the vast majority of people, Offsetting is the remedy used, and if they do not use an expert, the only “figures” they have to use are CEVs, and the CEVs cannot even accurately show who has the more valuable pension – let alone the quantum of any difference of value.
For actuarial expertise, or training and support services, don’t hesitate to get in touch with us at Mathieson Consulting.